Fleischer v. Botica Nolasco; G.R. No.

23241

Facts:
Manuel Gonzales was the owner of 5 shares of stock in question of Botica Nolasco, inc.
He then assigned and delivered the 5 shares to Henry Fleischer, by accomplishing the form
of endorsement provided on the back thereof, together with other credits, in consideration
of a large sum of money owned by Gonzales to Fleischer. Dr. Eduardo Miciano, who was the
secretary-treasurer of the corporation offered to buy from Fleischer, on behalf of the
corporation, the said shares of stock at par value of P100 per share. By virtue of Art. 12 of
the by-laws, the corporation had preferential right to buy from Gonzales the said shares.
However, Fleischer refused to sell them, and he requested Dr. Miciano to register the said
shares in his name.
Dr. Miciano refused to do so saying that it would be in contravention of the by-laws of the
corporation. Two days after the assignment of shares to Fleischer, Manuel Gonzales made a
written statement to Botica Nolasco requesting that the 5 shares of stock sold by him to
Henry Fleischer be not transferred to Fleischer’s name. He also acknowledged in said written
statement the preferential right of the corporation to buy the said 5 shares. Gonzales wrote
to Botica Nolasco withdrawing and cancelling his written consent to which letter Botanica
Nolasco replied declaring that his written statement was in conformity with the by-laws of
the Corporation. His letter was with no effect and that the shares in question had been
registered in the name of Botica Nolasco Inc. Henry Fleischer filed this complaint against the
Board of Directors of Botica Nolasco Co., Inc. in the Court of First Instance to order the latter
to register in the books of the corporation 5 shares of stock in his name, and pay him P500
for damages sustained by him resulting from the refusal of said body to register the shares
of stock.
Botica Nolasco alleged that pursuant to Art. 12 of its by-laws, the Corporation had
preferential right to buy from Fleischer said shares at the par value of P100 a share plus P90
as dividends corresponding to the year 1922, and the offer was refused by Fleischer. The
Trial Court ruled that Art. 12 of the bylaws of the corporation which gives it preferential right
to buy its shares from retiring stockholders, is in conflict with Act. No. 1459 (Corporation
Law), especially with section 35 thereof; and rendered a judgment ordering the Corporation,
though its board of directors, to register in the books of the corporation the 5 shares of stock
in the name of Fleischer, as shareholder or owner thereof instead of Manuel Gonzales (the
original owner).

Issue:
Whether or not Art. 12 of the By-Laws of the Corporation is in conflict with the
provisions of the Corporation Law. Yes.

Ruling:
As a general rule, the by-laws of the corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation and are not contradictory to the
general policy of the laws of the land. It is equally settled that by-laws of a corporation must
be reasonable and for a corporate purpose, and always within the charter limits. They must
always be strictly subordinate to the constitution and the general laws of the land.
The power of a corporation to enact by- laws restraining the sale and transfer of shares,
should not only be in harmony with the law or charter of the corporation, but such power
should be expressly granted in said law or charter. The only restraint imposed by the
Corporation Law upon transfer of shares is found in Sec. 35 of Act. No. 1459, as follows: “No
transfer, however, shall be valid, except as between the parties, until the transfer is entered
an noted upon the books of the corporation so as to show the names of the parties to the
transactions, the date of the transfer, the number of the certificate, and the number of
shares transferred." This restriction is necessary in order that the officers of the corporation
may know who the stockholders are, which is essential in conducting elections of officers, in.
calling meetings of stockholders, and for other purposes. But any restriction of the nature of
that imposed in the by-law now in question, is ultra vires, violative of the property rights of
shareholders, and in restraint of trade.
The by-law now in question cannot have any effect on the appellee. He had no
knowledge of such by-law when the shares were assigned to him. He obtained them in good
faith and for a valuable consideration. He was not a privy to the contract created by said by-
law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-Iaw
cannot operate to defeat his rights as a purchaser.
"An unauthorized by-law forbidding a shareholder to sell his shares without first offering
them to the corporation for a period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of the by-Iaw and took part in its
adoption."
“When no restriction is placed by public law on the transfer of corporate stock, a
purchaser is not affected by any contractual restriction of which he had no notice."
“A by-law of a corporation which provides that transfers of stock shall not be valid unless
approved by the board of directors, while it may be enforced as a reasonable regulation for
the protection of the corporation against worthless stockholders, cannot be made available
to defeat the rights of third persons." Whenever a corporation refuses to transfer and
register stock in cases like the present, mandamus will lie to compel the officers of the
corporation to transfer said stock upon the books of the corporation.

Doctrine: A stock corporation in adopting by-laws governing the transfer of shares of stock
should take into consideration the specific provisions of the Corporation Law. The by-laws of
corporations should be made to harmonize with the provisions of the Corporation Law.